B.B.U. gross margins up, volume pressure easing

by Josh Sosland
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MEXICO CITY — In a very difficult operating environment over the course of 2011, solid signs of improvement emerged in the fourth quarter for the U.S. operations of Grupo Bimbo S.A.B. de C.V.
Operating income of the U.S. business was 3,569 million pesos ($279 million) in the year ended Dec. 31, 2011, down 5% from 3,739 million pesos in 2010. Sales were 53,810 million pesos ($4,213 million), up 12% from 47,875 million pesos.

In the fourth quarter, the U.S. business had operating profit of 637 million pesos ($49.9 million), up 6% from 598 million. Sales were 19,255 million pesos ($1,507 million), up 60%.

Parsing out underlying operating trends for Bimbo Bakeries USA was complicated by a number of factors in 2011, including wide commodity price swings, the integration of the Sara Lee operations and the consolidation of independent operators in the United States.

Perhaps the strongest sign of prospective improvement was a 1.9 percentage point improvement in gross margins in the fourth quarter. At 50%, the gross margin compared with 48.1% in the fourth quarter of 2010. For the entire year, the gross margin was 49.9%, up from 49.5%.The fourth-quarter improvement “reflected pricing initiatives in the first half of the year,” Bimbo said.

The 6% operating income gain in the fourth quarter was modest compared with the 60% sales gain. The company’s operating margin was 3.3%, versus 5% in the fourth quarter of 2010, a result Bimbo said was no surprise.

“As expected, there was some dilution in the margin due to the integration and ongoing investments in expanding the distribution network,” the company said. “On a cumulative basis, gross margin pressuring the first half of the year, investments in distribution, the startup of a new production plant and the integration of the Sara Lee operation contributed to the 4.5% decline in operating income and 120 basis point reduction in the margin, to 6.6% (for the year).”

Even though sales were up 60% in the fourth quarter, mostly because of the Sara Lee acquisition, comparable volume figures were lower. Still, Bimbo saw positive signs in the volume data.

Bimbo broke down the year-to-year sales gain as 32 percentage points coming from Sara Lee, 14 coming from the independent operators, and 13 from organic performance (10 of which was from foreign exchange).

Bimbo described the volume decline as “limited” and “fully offset by pricing initiatives over the course of the year.” The company continued, “It should be noted that the volume decline was lower than in previous quarters.” The company did not offer a figure for the volume decline.

Bimbo said the expansion of the number of delivery drivers who are independent operators necessitated the accounting changes — consolidation of the I.O.’s in the reported figures.

“As of the fourth quarter of 2011, the company’s results reflect the consolidation of the I.O.s in the United states acting as legal entities, which are subject to the Variable Interest Entity (VIE) accounting rules under U.S. GAAP (generally accepted accounting principles), Mexican GAAP and I.F.R.S. (international financial reporting standards),” Bimbo said. “Consolidation was not required prior to 2011 because the impact was deemed immaterial. However a growing number of I.O.’s have converted to legal entities from sole proprietorships, and the Sara Lee acquisition has significantly increased the number of I.O’s acting as legal entities. It should be noted that Sara Lee had consolidated their I.O. VIEs for many years. This consolidation is reflected across the entire P&L (profit and loss statements). However, it has no impact on the net majority income, as the I.O. effect is offset in the non-controlling interest line. While the current period reporting shows the impact of a full year of I.O. consolidation, going forward it will be reported on a quarterly basis.”

For Grupo Bimbo, net majority income in 2011 was 5,329 million pesos ($471 million), down 1.2% from 5,392 million pesos in 2010. Sales were 133,732 million pesos ($10,471 million), up 14% from 117,163 million.

In the fourth quarter, net majority income was 1,012 million pesos ($79 million), down 26% from the same period in 2010. Sales were 41,624 million pesos ($3,259 million), up 37%.

“Higher raw material costs on a comparative basis combined with the impact of the peso devaluation on the Mexico operation resulted in a 90 basis point contraction in the consolidated gross margin,” Bimbo said of fourth-quarter results. “At the operating level, gross margin pressure, integration costs and the expected dilution in the U.S. following the Sara Lee integration were further exacerbated by a goodwill impairment charge in Brazil resulting from longer than expected return on investment timeframes for certain investments. As a result, there was a 1.8 and 2.2 percentage pint decline in the operating and EBITDA margins respectively. “

During the fourth quarter, sales in the United States, at 19,255 million pesos ($1,507 million), eclipsed sales in Mexico, at 17,256 million ($1,351 million). Operating income in Mexico, at 2,830 million pesos ($222 million), was far greater than the 637 million ($50 million) in the United States.

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